Asian giants changing face of world economy

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China and India are competing for jobs and markets,
again, writes Tony Parkinson.

FIVE hundred years ago, China and India together accounted for
more than half of world economic output. On their present
trajectory, it won't be long before the world's two most populous
nations are well and truly back as powerhouses on a global
scale.

The direct impact on the hip pocket of soaring oil prices is a
jolting reminder to advanced Western nations of how the balances of
power are changing. China and India are not only back in town,
competing for jobs and markets  they are also big emerging
players in the bidding war for global energy supplies, and they are
ravenous.

Only Australians in the 40-plus age group will remember the pain
of the oil price shocks of the 1970s: spiralling prices at the
petrol bowser; the inconvenience of queues and "odds and evens"
rationing. The manipulation of the oil market by the OPEC cartel
choked world energy production and supply, sending Western
economies into recession.

In contrast, today's oil crisis is largely demand-driven. The
ongoing instability in Iraq and the wider Middle East, along with
the crushing impact of hurricane Katrina on the southern states of
the United States, including oil production and refining in the
Gulf of Mexico, are causing some uncertainty in supply.
Significantly, the Bush Administration will unlock its strategic
oil reserve in a bid to temper overheated speculation by hedge
funds.

Yet most major oil producers have been pumping at or near full
capacity, with world supply exceeding 80 million barrels a day. Oil
reserves are 50 per cent greater than 30 years ago, but it cannot
be pumped and refined quickly enough to meet the surge in
demand.

This big structural shift results predominantly from the rapid
economic growth of China and India, and their hunger for the energy
imports necessary to keep industries humming, and to satisfy the
material aspirations of their new moneyed classes.

China's and India's thirst for oil has been growing by about a
million barrels a day  40 per cent of total growth in world
demand. China is now second only to the US as the world's biggest
user of fossil fuels. Flourishing consumerism has led to booming
car sales (2.5 million new cars each year in China). This surge in
consumption has stretched world oil production capacity and helped
drive crude prices to record highs.

As veteran American trade strategist Clyde Prestowitz reminds us
in his latest book, Three Billion New Capitalists: The Great
Shift of Wealth and Power to the East, this is evidence of a
world economy undergoing a dramatic makeover, the so-called third
wave of global capitalism.

Globalisation creates, and generates, wealth. Streamlined
transport, communications and information technology improves
exponentially the speed and distance over which goods and services
(and ideas) can be traded from one place to another. This provides
developing economies with a golden opportunity to use their
low-wage structures to attract investment, and produce and sell
goods into affluent markets at cheaper prices.

The "little tigers" of East Asia were the first beneficiaries.
Then Latin America. Now the collapse of the socialist model has
brought China, India and the former Eastern bloc nations into the
mix, effectively doubling the labour force operating in an open,
global market. Oil price is just one manifestation of the profound
implications.

One clear benefit has been a significant decline in world
poverty. The percentage of people living on less than $US2 a day
fell, in real terms, from 56 per cent in 1980 to 23 per cent in
2000. Much of this is attributable to the economic reincarnation of
China and India.

But the adjustment costs are also massive. There has been an
inevitable backlash in Western societies as competition and the
free flow of capital produce effects such as the outsourcing of
jobs to low-wage economies  not only for clothing, textile
and footwear workers, but for those involved in high-end
manufacturing and computer software.

Smaller developing countries, too, are struggling to compete
with China and India. The two Asian giants have all the advantages
of scale, flowing from a massive pool of highly skilled but
low-cost workers. They can't be beaten on price or, increasingly,
on quality.

These changes have been in the pipeline for a decade or more,
and they will not be a passing phenomenon. As India and China
produce a multitude of well-trained scientists and engineers, and
work to develop independent research and development capabilities
to match it with the best of the West, the gap in leap-ahead
technologies will narrow.

I caught up with Clyde Prestowitz on his recent book tour of
Asia. He doubts that Western societies, and Americans in
particular, understand the seismic impact this will have on their
lives. To what extent are affluent, advanced societies prepared to
adapt, adjust, and absorb the shockwaves of these new and massive
entrants to the global market?

He accepts that Australia, as a major resources and energy
exporter, might well see the emergence of China and India more as
an opportunity than a threat. But he wonders aloud whether our
knowledge industries, like those of the US, appreciate the nature
of the competition they will soon be facing. In India, for example,
biotechnology research can be done at a fifth of the cost in
America. For major companies, the savings to be made by outsourcing
jobs to Bangalore or Mumbai are seen as too lucrative to pass
up.

Prestowitz tells the story of his eldest son giving up a job as
a software developer to invest in a snow-plough company at the Lake
Tahoe ski resort. Why, he asked, would someone trade the education
and experience acquired in computer science for the mundane work of
snow-ploughing? "Dad," his son explained. "They can't move the snow
to India."